International networks: go global

Six international accounting networks could currently be considered to have
global reach. What does the future hold for them?

The international networks created by the Big Four firms, plus BDO
International and Grant Thornton International, generate impressive fees ­ in
excess of $25bn (£12.6bn) for PricewaterhouseCoopers alone. BDO and GTI may
trail some way behind (GTI reporting fees of $3.5bn in 2007), but they are
growing strongly.

‘The opportunities for BDO International are immense and our growth stats in
recent years have been good,’ says Jeremy Newman, who becomes CEO of the fifth
largest network in October.

Just as regulator and corporate sentiment in the UK has warmed towards
players outside the Big Four, so it has elsewhere.

Newman says this is notable in developing markets such as China, where BDO
International network members are ‘seeing a lot of interest’. This isn’t to say
that Newman envisages BDO International competing for the audits of the largest
global corporations.

Its UK clients tend to be FTSE 350 rather than FTSE 100, and this
mid-corporate client pattern is repeated internationally.

GTI CEO David McDonnell also anticipates a bright future. ‘We see the
opportunity to considerably increase our market share,’ he says. ‘We have no
aspiration to be the same size as the Big Four, but we do have the aspiration to
be bigger. Our plan is to double in size in the next three to four years, by
organic growth and acquisition.’

Like Newman, McDonnell sees great growth potential in the developing
economies such as China, India and Brazil, though the US firm has also been a
major driver of growth.

McDonnell says that GTI member firms have always invested heavily in their

global organisation.

‘It’s no good having a network of firms round the world if it’s not that
cohesive. Since the late ‘80s we have had a commitment to a single name, quality
control, investing in a sizeable HQ ­ based on a Big Four-type model, with Big
Four-type costs,’ he explains.

Breaking the mould

Though the traditional network model remains dominant, KPMG has broken step
with its rivals ­ merging its UK, German and Swiss firms to create KPMG Europe.

Joint chairman John Griffiths-Jones says there are the key reasons behind the
move. ‘We can provide a better service to the client and a better work
experience to our people. These are our two main assets ­ clients and people.’

Though still early days, Griffiths-Jones appears content with progress.
‘After six months we can’t say we have proved it definitely works,’ he says.
‘But I am quite chipper about it. Clients are happy. We have had some wins, we
have had one or two arguments, but that is fine.’

He envisages other European network firms joining in future. ‘A year ago we
sold it to ourselves on a vision,’ he says. ‘Once we’ve been running a year, we
will be able to sell it on reality.’

Other networks, publicly at least, have yet shown any imminent signs of
following suit. ‘I think they are waiting to see whether we can make it work,’
Griffiths-Jones notes.

The chances are that others will follow, however. ‘I think it will happen,’
says GTI’s McDonnell. ‘If you go to the medium-term, I do see our organisation
consisting of fewer member firms.’

Some current members will have merged cross-border. ‘That’s most likely where
economies are integrated,’ McDonnell says.

‘In Europe we have a single market, and so there is logic to it. We have had
discussions about it, but it’s not happening in the immediate future.’

One potential barrier to such mergers is the risk of unlimited liability
claims crossing national boundaries. However, KPMG Europe’s structure is
designed with this risk in mind, involving a non-trading holding company and
locally-based trading subsidiaries. ‘In theory, the claim lands in the same
subsidiary as it would pre-merger,’ Griffiths-Jones says.

Even so, any transatlantic merger is currently out of the question due to the
particularly litigious environment in the States and the sheer size of claims
that can arise there. ‘For the immediate future, working really closely with our
American colleagues is the obvious way to go,’ Griffiths-Jones says.

Most networks are familiar with liability claims and disputes. GTI recently
won a battle with insurers Brit, to the effect that legal fees incurred in
defence of Parmalat-related claims will be covered by the insurance policy. ‘We
are very pleased,’ McDonnell says.

BDO International meanwhile is challenging the attribution of any liability
to itself following a successful suit brought by Portuguese bank Banco Espirito
Santo against member firm BDO Seidman.

A jury is to decide the international case. ‘It’s not causing me any lack of
sleep,’ Newman says. In fact, Newman says he doesn’t consider the liability
threat in general to be a massive issue at present.

‘It’s not an issue that stops growth of the firm, other than indirectly. It
doesn’t stop us growing in the UK, India, China or anywhere else. What it does
prevent is closer cooperation between member firms. It’s a barrier to
integration. It’s a barrier to being able to provide as seamless a service as we
would like.’

Insurers are keeping an eye on liability patterns. ‘There is a general trend
towards bigger levels of litigation,’ says Gary Head, underwriting director of
the professions department for Hiscox UK. ‘When you put that in the context of
these international networks, where contracts and complexities are larger than
normal, inevitably you are going to end up with the potential for very damaging
litigation.’

Given that fees charged by audit firms don’t fully reflect their unlimited
liability exposure, Head feels that capping liability is desirable for firms.
‘It’s a very sensible thing for them to be able to do,’ he says.

Despite the obvious challenges involved in running international networks,
those involved are optimistic about the future.

‘If you look back over the last 30 years, firms have shown enormous
resilience and ability to keep themselves current,’ says PricewaterhouseCoopers
partner Peter Wyman. ‘I think that will carry on. [But] I expect things will
look quite different in 30 years’ time. Will all our global HQs be in China not
America? Your guess is as good as mine.’

Truly European

KPMG became the first of the big firms to set formal ties between its firms
when it created KPMG Europe, an entity containing 18,000 partners across the UK,
Germany and Switzerland.

However the strategy to create a ‘super-firm’ has not all gone smoothly.
Partners in KPMG’s Dutch member firm voted against joining KPMG Europe, which in
turn blew out plans to introduce Jaap van Everdingen as the super-firm’s CFO –
which instead went to Bernd Erle.

However the latest suggestions are that the Dutch will be won around and soon
join KPMG Europe.